The origins of the Federal Reserve

122 Pages·2009·1.715 MB·English

by  Rothbard, Murray Newton

T H E O R I G I N S O F T H E
FEDERAL RESERVE

T H E O R I G I N S O F T H E
FEDERAL RESERVE
by
M R
URRAY OTHBARD
LvMI
Ludwig von Mises Institute
Selected from
A H M B U
ISTORY OF ONEY AND ANKING IN THE NITED
S : T C E W W II
TATES HE OLONIAL RA TO ORLD AR
© 2009 by the Ludwig von Mises Institute and published under the
Creative Commons Attribution License 3.0.
http://creativecommons.org/licenses/by/3.0/
Ludwig von Mises Institute
518 West Magnolia Avenue
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www.mises.org
ISBN: 978-1-933550-47-3
Contents
SECTION ONE
The Progressive Movement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
SECTION TWO
Unhappiness with the National Banking System . . . . . . . . . . . 11
SECTION THREE
The Beginnings of the “Reform” Movement:
The Indianapolis Monetary Convention . . . . . . . . . . . . . . . . . . 15
SECTION FOUR
The Gold Standard Act of 1900 and After . . . . . . . . . . . . . . . . . 33
SECTION FIVE
Charles A. Conant, Surplus Capital,
and Economic Imperialism . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
SECTION SIX
Conant, Monetary Imperialism,
and the Gold-Exchange Standard . . . . . . . . . . . . . . . . . . . . . . . 53
SECTION SEVEN
Jacob Schiff Ignites the Drive for a Central Bank . . . . . . . . . . . 71
SECTION EIGHT
The Panic of 1907 and
Mobilization for a Central Bank . . . . . . . . . . . . . . . . . . . . . . . . 79
SECTION NINE
The Final Phase: Coping with the
Democratic Ascendancy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
SECTION TEN
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
5

The Progressive Movement1
The Federal Reserve Act of December 23, 1913, was part
and parcel of the wave of Progressive legislation, on local,
state, and federal levels of government, that began about 1900.
Progressivism was a bipartisan movement which, in the course
of the fi rst two decades of the twentieth century, transformed
the American economy and society from one of roughly lais-
sez-faire to one of centralized statism.
Until the 1960s, historians had established the myth that
Progressivism was a virtual uprising of workers and farmers
who, guided by a new generation of altruistic experts and
intellectuals, surmounted fi erce big business opposition in
order to curb, regulate, and control what had been a system
of accelerating monopoly in the late nineteenth century. A
generation of research and scholarship, however, has now
exploded that myth for all parts of the American polity, and
it has become all too clear that the truth is the reverse of
this well-worn fable. In contrast, what actually happened was
that business became increasingly competitive during the late
nineteenth century, and that various big-business interests, led
by the powerful fi nancial house of J.P. Morgan and Company,
Originally published as “The Origins of the Federal Reserve,” Quarterly
Journal of Austrian Economics 2, no. 3 (Fall): 3–51.—Ed.
7
8 The Origins of the Federal Reserve
had tried desperately to establish successful cartels on the
free market. The fi rst wave of such cartels was in the fi rst
large-scale business, railroads, and in every case, the attempt
to increase profi ts, by cutting sales with a quota system and
thereby to raise prices or rates, collapsed quickly from internal
competition within the cartel and from external competition
by new competitors eager to undercut the cartel. During the
1890s, in the new fi eld of large-scale industrial corporations,
big-business interests tried to establish high prices and reduced
production via mergers, and again, in every case, the mergers
collapsed from the winds of new competition. In both sets
of cartel attempts, J.P. Morgan and Company had taken the
lead, and in both sets of cases, the market, hampered though
it was by high protective tariff walls, managed to nullify these
attempts at voluntary cartelization.
It then became clear to these big-business interests that the
only way to establish a cartelized economy, an economy that
would ensure their continued economic dominance and high
profi ts, would be to use the powers of government to establish
and maintain cartels by coercion. In other words, to trans-
form the economy from roughly laissez-faire to centralized
and coordinated statism. But how could the American people,
steeped in a long tradition of fi erce opposition to government-
imposed monopoly, go along with this program? How could
the public’s consent to the New Order be engineered?
Fortunately for the cartelists, a solution to this vexing prob-
lem lay at hand. Monopoly could be put over in the name
of opposition to monopoly! In that way, using the rhetoric
beloved by Americans, the form of the political economy could
be maintained, while the content could be totally reversed.
Monopoly had always been defi ned, in the popular parlance
and among economists, as “grants of exclusive privilege” by
the government. It was now simply redefi ned as “big business”
Murray Rothbard 9
or business competitive practices, such as price-cutting, so that
regulatory commissions, from the Interstate Commerce Com-
mission to the Federal Trade Commission to state insurance
commissions, were lobbied for and staffed by big-business
men from the regulated industry, all done in the name of
curbing “big business monopoly” on the free market. In that
way, the regulatory commissions could subsidize, restrict, and
cartelize in the name of “opposing monopoly,” as well as pro-
moting the general welfare and national security. Once again,
it was railroad monopoly that paved the way.
For this intellectual shell game, the cartelists needed the
support of the nation’s intellectuals, the class of professional
opinion molders in society. The Morgans needed a smoke
screen of ideology, setting forth the rationale and the apolo-
getics for the New Order. Again, fortunately for them, the
intellectuals were ready and eager for the new alliance. The
enormous growth of intellectuals, academics, social scien-
tists, technocrats, engineers, social workers, physicians, and
occupational “guilds” of all types in the late nineteenth cen-
tury led most of these groups to organize for a far greater
share of the pie than they could possibly achieve on the
free market. These intellectuals needed the State to license,
restrict, and cartelize their occupations, so as to raise the
incomes for the fortunate people already in these fi elds. In
return for their serving as apologists for the new statism, the
State was prepared to offer not only cartelized occupations,
but also ever increasing and cushier jobs in the bureaucracy
to plan and propagandize for the newly statized society. And
the intellectuals were ready for it, having learned in gradu-
ate schools in Germany the glories of statism and organicist
socialism, of a harmonious “middle way” between dog-eat-
dog laissez-faire on the one hand and proletarian Marxism
on the other. Instead, big government, staffed by intellectuals